Rabobank dairy analyst Emma Higgins said land values have been in neutral for the past decade and are likely to drift downwards over the next five years.
In her report, Afloat but Drifting Backwards, she predicts an average $6.25/kg MS farmgate milk price, which will be barely break-even with low investor confidence, high farm debt, tighter Reserve Bank regulations, foreign capital restrictions and the costs of environmental compliance also factors.
AgFirst Waikato agricultural economist Phil Journeaux wrote Waikato dairy land values down by 15% last June.
“The balance sheet took a hit and that reflected what had happened in farm sales around the region.”
Journeaux will almost certainly put in a further 10% write-down this winter.
The Rabobank prediction of a conservative $6.25 payout is in tune with the average of the past 10 years, excluding this season, of $6.15.
“Dairy farmers need $6 for operating costs and living and $7 if they want to pay off debt and meet environmental requirements,” Journeaux said.
On-farm cost inflation runs ahead of the Consumer Price Index by two or three times, particularly for farm labour and supplementary feeding.
Rural commentator Keith Woodford has written about what he calls a considerable portion of dairy farmers who now have minimal equity.
Market prices for dairy land have dropped 20% in the past year and no floor is in sight.
South Island dairy land values are below $30/kg MS and in Taranaki and Waikato only good farms are still selling at or above $35.
By applying DairyNZ 2018 financial year survey figures and taking 20% off the asset values Woodford estimates 13% of farmers now have negative equity and a further 28% have equity of less than 25%, some of them close to zero.
Should asset values decline a further 10% then about 24% of dairy farmers will have negative equity.
“None of these figures will be precise and the numbers are a moving target.
“But there can be little doubt that there are now many dairy farmers whose financial position is highly insecure.”
Fortunately, nearly all dairy farms will be cashflow positive this year and further debt repayments should be possible after paying income tax.
Latest Reserve Bank figures show dairy farm debt fell from $41.5 billion in November 2018 to $40.8b last November.
DairyNZ strategy and investment leader Bruce Thorrold said the situation is as Higgins wrote and a thin real estate market is being affected by uncertainty, lack of foreign investment and tight credit policies.
“The pent-up dairy farm sales are a consequence of these worries so we need to address those concerns.
“We need to clarify the policy settings and help individual farmers become more profitable and resilient.
“Farmers, DairyNZ, consultants and others in the industry can all contribute.
“If we solve the inherent problems then the land market will move.”
The economics team at DairyNZ is working on its Economic Survey of 2018-19, to be published in May, having received the latest figures from Dairybase.
The key numbers have not shifted much from 2017-18, including farm working expenses steady at $4.36/kg, Thorrold said.
“It is clear that farmers are profitable and debt is being repaid but the equity position is unknown because of lack of farm sales.”
